Winners, losers in coffee wars
Here's how price cuts at Smucker and Kraft could work out for the top players.
By Will Ashworth
The coffee wars escalated last week when J.M. Smucker (SJM) lowered its prices by 6% for Folgers and the rest of its brands sold in grocery stores. Immediately, investors began speculating who else would follow suit.
Just a few days later we got our answer as Kraft (KFT) announced it too was lowering prices by 6% for its Maxwell House and Yuban brands and by 10% for its Gevalia brand, which Kraft already was selling in Scandinavia to replace sales lost when it and Starbucks (SBUX) ended their relationship in 2011.
With arabica bean prices dropping by almost 30% in the past year, winners and losers should be sorted out. Let's see who they are.
Starbucks took over the sale and distribution of its packaged coffee on March 1, 2011. Since then, SBUX stock has increased 68% compared to 27% for Kraft. Most of Kraft's gain is due to its split later this year into two companies. Maxwell House, Philadelphia and Kraft's other slower-growth brands will be part of a North American grocery business under the Kraft moniker, while its higher-growth brands -- like Cadbury -- will operate as the newly created Mondelez International division, assuming shareholders rubber stamp the move in a vote Wednesday.
Whatever happens, it appears Folgers' move was meant to provoke a reaction from Kraft -- and that's exactly what happened. Folgers wants to take market share from Maxwell House, and I don't see how Kraft comes out of this unscathed.
However, over at Starbucks, I can say with much certainty that it won't be rolling back prices in either its channel development segment (formerly its consumer products group) or in its own stores. Customers have gotten used to paying current prices. So, it should benefit now from lower wholesale coffee prices, then it will simply hold the line on future price hikes when wholesale prices rise again.
It's been more than a year since Starbucks took back its consumer business, and sales have been brisk, up 56.4% to $781.9 million in the first six months of its fiscal year through April 1. I can see this business, which currently accounts for approximately 12% of revenue, growing to 20% of overall revenue. I just don't see the Folgers-Kraft price war affecting Starbucks in the slightest.
Green Mountain Coffee Roasters (GMCR), on the other hand, seems like it's in a heap of trouble. In March, Starbucks announced that it will be introducing Verismo, its own single-cup coffee machine, later this year, which will allow users to make espresso drinks in addition to regular brewed coffee. The news tanked Green Mountain's stock.
Supporters of Green Mountain mistakenly believe Starbucks is late to the party and that Green Mountain holds an insurmountable lead in the single-serve market. While the latter statement might be true, it made no sense whatsoever for the world's biggest coffee retailer to not have its own single-cup machine.
Starbucks CEO Howard Schultz rightly worked a deal with Green Mountain so Starbucks could sell its coffee in K-Cups for use with GMCR's Keurig machines because they're popular and distribution in consumer goods is everything. How else do you account for Starbucks' 56.4% increase in grocery store revenue?
This simply was a business decision by Starbucks to bide its time until it could eliminate the middleman. With patents ending this fall, Starbucks could opt to sell its own coffee pods for use in Keurig brewers.
In my opinion, lower coffee prices only exacerbate the situation for Green Mountain because the price drops commoditizes its product at a time when its most important customer is ready to go it alone. I don't see this ending well for the Vermont company.
Lastly, in addition to Folgers and Starbucks, another potential winner from lower coffee prices is Peet's Coffee & Tea (PEET), which saw first-quarter profits drop 39% as a result of roasting prices that were 44% higher in first quarter compared to last year. But this time next year, Peet's likely will report the exact opposite as lower prices in the future lead to higher profits. Much like Starbucks, Peet's likely will leave prices alone, opting to keep them consistent.
So in the end, it appears Starbucks, Folger's and Peet's will benefit from lower prices, while Kraft and Green Mountain suffer. But no matter what happens with prices, I'd stay away from Green Mountain. It's in deep pain -- just ask David Einhorn.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
More from InvestorPlace.com
Our family buys what ever is on sale...
IF SALE PRICE IS LOW ENOUGH, WE BUY A BUNCH AT THAT TIME...
Drinking some of that, good to the last drop stuff, as I type...lol
IE Folgers or Maxwell house. To me that is like drinking colored water. I usually make a pot of Cafe Bustello or Seattle's Best, Both are cheaper, one is an espresso grind and the other a french roast. Both are full bodied and make a terrific cup of coffeee/
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
Fed keeps important 'considerable time' language in reference to short-term interest rates, but dissents and dots leave doubts.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.